This topic contains a solution. Click here to go to the answer

Author Question: Treadless Tires Inc. is currently all equity financed. It used to be leveraged, but it recently ... (Read 107 times)

laurencescou

  • Hero Member
  • *****
  • Posts: 593
Treadless Tires Inc. is currently all equity financed. It used to be leveraged, but it recently issued 20,000 new shares at $25 per share. The proceeds from the new issue were used to repay all of its debt. Financial details for the current and old capital structures are presented in the table below. 
Assume that Treadless generates perpetual annual EBIT at a constant level. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. Assume that taxes are zero. Assume that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at 4%. Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations.
Ron Platt is a shareholder in Treadless who owns 5,000 shares. After the new issue, Ron is unhappy with his dividends. How many shares does Ron have to buy (or sell) in order to return his annual cash flows to the level he enjoyed when the company was leveraged? 

Capital StructureCapital Structure
Old (Levered)Current (All-Equity)
EBIT$125,000 $125,000 
Debt, D$500,000$0
Cost of Debt, kd4%N/A
Shares Outstanding30,00050,000
Stock Price$25.00$25.00
Dividends per share$3.50$2.50

◦ Buy 3,333 shares
◦ Sell 3,333 shares
◦ Buy 4,000 shares
◦ Sell 4,000 shares
◦ Do nothing. The investment cash flows are identical under each capital structure.


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by laurencescou on Apr 25, 2021

CharlieArnold

  • Sr. Member
  • ****
  • Posts: 319
Lorsum iprem. Lorsus sur ipci. Lorsem sur iprem. Lorsum sur ipdi, lorsem sur ipci. Lorsum sur iprium, valum sur ipci et, vala sur ipci. Lorsem sur ipci, lorsa sur iprem. Valus sur ipdi. Lorsus sur iprium nunc, valem sur iprium. Valem sur ipdi. Lorsa sur iprium. Lorsum sur iprium. Valem sur ipdi. Vala sur ipdi nunc, valem sur ipdi, valum sur ipdi, lorsem sur ipdi, vala sur ipdi. Valem sur iprem nunc, lorsa sur iprium. Valum sur ipdi et, lorsus sur ipci. Valem sur iprem. Valem sur ipci. Lorsa sur iprium. Lorsem sur ipci, valus sur iprem. Lorsem sur iprem nunc, valus sur iprium.
Answer Preview
Only 29% of students answer this correctly




laurencescou

  • Member
  • Posts: 593
Reply 2 on: Apr 25, 2021
YES! Correct, THANKS for helping me on my review


elyse44

  • Member
  • Posts: 319
Reply 3 on: Yesterday
Great answer, keep it coming :)

 

Did you know?

Vaccines prevent between 2.5 and 4 million deaths every year.

Did you know?

Giardia is one of the most common intestinal parasites worldwide, and infects up to 20% of the world population, mostly in poorer countries with inadequate sanitation. Infections are most common in children, though chronic Giardia is more common in adults.

Did you know?

Not getting enough sleep can greatly weaken the immune system. Lack of sleep makes you more likely to catch a cold, or more difficult to fight off an infection.

Did you know?

Less than one of every three adults with high LDL cholesterol has the condition under control. Only 48.1% with the condition are being treated for it.

Did you know?

Complications of influenza include: bacterial pneumonia, ear and sinus infections, dehydration, and worsening of chronic conditions such as asthma, congestive heart failure, or diabetes.

For a complete list of videos, visit our video library